Income Taxes - PowerPoint PPT Presentation

Income Taxes Income Taxes Taxable Income of Individuals and Business Firms Classification of Business Expenditures Individual Tax Rates / Corporate Tax Rates Federal and State Taxes Capital Gains and Losses Economic Analysis Before and After Taxes Income Taxes

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Income Taxes

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Bill is an unmarried student. He earned $8,000 in the summer, plus another $2,000 during the rest of the year. When he files his income tax return, he is allowed one exemption. He estimates he spent $1000 on allowable itemized deductions. How much income tax does he pay?

In the unlikely event that an asset is sold for an amount greater than its cost basis, the gains (salvage value – book value) are divided into two parts for tax purposes:

Gains = Capital gains + Ordinary gains (Depreciation recapture)

Capital gains = Salvage value – Cost basis

Ordinary gains = Cost basis – Book value

If asset is sold for an amount less than its book value than

Ordinary loss = Book value - Salvage value

The distinction between capital and ordinary gains is only necessary when capital gains are taxed at the capital gain tax rate and ordinary gains (or depreciation recapture) at the ordinary income tax rate.

This provision could allow Congress to restore preferential treatment for capital gains at some future time.

Capital gains and ordinary gains may be taxed at different rates in the future.

A firm is losing sales because it cannot always make quick deliveries.

By investing an extra $20,000 in inventory it is believed that the before-tax profit of the firm will be $1,000 more the first year. The second year before-tax extra profit will be $1,500.

The extra profit is then expected to go up $500 more each year. The investment in extra inventory may be recovered at the end of a four-year analysis period by selling it and not replenishing the inventory.

Assume the incremental tax rate is 39%.

We wish to find the ROR before taxes, and the ROR after taxes.

Important:

Inventory is not considered a depreciable asset.

The investment in extra inventory is not depreciated.

(Even though an old inventory may have less value to the owner, the tax code does not recognize this.)